Is This Gold Rally for Real?

By Jonnelle Marte

Gold rallied sharply on Friday morning, approaching $1,750 an ounce, on the heels of a disappointing employment report and new bond-buying program in Europe. But how long before the yellow metal goes dull again?

Overall, gold futures are up more than 3% for the week and 13% since their lows in May, as upbeat news in Europe and disappointing job news in the U.S. have combined to stoke inflation fears. The Labor Department Friday morning reported that the U.S. added a fewer-than-expected 96,000 jobs in August — news experts say that may spur the Federal Reserve to launching another stimulus program, including further bond buying, when it meets next week. Friday’s surge continued a rise that started Thursday after the European Central Bank announced an unlimited bond-buying program to bail out some of the region’s most troubled governments.

Investors worry that these programs could increase the money supply and devalue the currencies in their respective markets, and they’re flocking to gold as an inflation hedge, advisers say. “People started to speculate about the depreciation of the dollar,” says Matthew Tuttle, chief investment officer at Tuttle Wealth Management in Stamford, Conn. “So now you see gold going through the roof.” Tuttle himself upped his gold allocation this week to as much as 10% of his clients’ portfolios, up from zero previously, out of worries about inflation risks.

But some pros aren’t yet ready to stock their vaults with more gold coins. Cole Wilcox, chief investment officer for Longboard Asset Management, in Scottsdale, Ariz., thinks much of the short-term upside in gold prices has already been realized by this rally, since markets have long been anticipating a bond-buying program from the ECB.

Inflation, meanwhile, may not take off while overall economic growth remains sluggish, some advisers say. Uncertainty over future tax policy and other factors is making many business owners cautious about expanding and hiring more workers, says Sharon Stark, chief market strategist for Sterne Agee. That, in turn, restrains consumer spending and limits price growth. “It’s really hard to see inflation picking up without stronger GDP growth,” says Stark.

For now, some money managers are getting exposure to gold through diversified funds, rather than making a bigger bet. Ethan Anderson, senior portfolio manager for Rehmann Financial in Grand Rapids, Mich., owns gold through diversified currency funds. For instance, the $514 million Merk Hard Currency Fund invests 9% of its assets in gold but also owns currencies like the New Zealand dollar, the Canadian dollar and the Norwegian krone. Anderson also likes the $17 billion Permanent Portfolio (PRPFX), which invests 20% in gold but also allocates 35% to U.S. Treasury securities and other dollar-based investments that could do well if gold suffers.

Anderson says he might make a pure play on gold if economic growth picks up. “If inflation truly becomes a problem, it will be problematic for years,” says Anderson. “So there will be plenty of time to hold gold.”

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